Look to UK and South Africa on retirement products

Australia’s superannuation industry trails the UK at engaging with all workers to optimise their retirement savings and has been eclipsed by South Africa in offering a default retirement product.

That is the view of Schroders global head of defined contribution Lesley-Ann Morgan, who shared the firm’s global snapshot of how the industry is improving outcomes for savers and retirees.

One global theme is that funds are designing products based on thin data about retirees’ spending habits, Morgan says, despite Australia having some of the best information on retiree consumption, via the government.

Super funds in Australia are responding to the government’s proposed Comprehensive Income Product for Retirement (CIPR) or ‘MyRetirement’ legislation and being urged to develop a retirement income framework. The local funds could follow the UK’s lead to better engage with savers and steer their retirement strategies in the right direction, Morgan says.

The UK launched a prototype pension dashboard in March 2017, thanks to a cross-industry collaboration on shared data to give savers a glimpse of their accounts’ performance. The pension dashboard was designed to give people a sense of their overall preparations for retirement and empower them to change tack if they were falling short.

Schroders, a majority family-owned investment manager holding US$577 billion ($735 billion) under management, including $43 billion in Australia, on behalf of superannuation funds and other clients, gathers its own information in a comprehensive annual survey of 22,000 investors across 30 countries.

The latest study revealed 73 per cent of Australian retirees wished they had saved more, which was above the global average of 66 per cent, with 22 per cent feeling seriously underfunded.

“One of the risks that Australia has…is people don’t really understand what they’ve got and need to work longer or retire with not enough,’’ Morgan says. “People need dashboards. Financial planners have a lot of information in place but the proportion of people seeing them is about 15 to 20 per cent.”

She says that for the UK Government dashboard, every single pension provider put their asset data into one system, so everyone could view how much they had and whether or not they needed to increase their combined benefits.

The next step was to give people more information and help them engage with their own savings and act on the data to improve their retirement plan, Morgan says.

But she warns funds engaging too frequently with too much information may create knee-jerk reactions to market movements rather than encouraging workers to take a long-term view.

“There’s a risk that too much data might drive poor behaviour,’’ she says. “If you’ve got information about assets on a daily basis, like a bank account, evidence from retail consumers is that they tend to react to market falls and pull out.”

Meanwhile, South Africa has beaten Australia to the punch with a post-retirement default. In September 2017, government regulation called for trustees to provide a default investment portfolio to contributing members who do not make any choice regarding how their savings should be invested at retirement.

“For the majority of people in super and corporate plans around the world, most have invested in the default…They’ve never really had to make an investment decision about their pension strategy,’’ Morgan says. “While it’s not a good idea to compare the UK and Australia, which gives full freedom at retirement, the UK’s Financial Conduct Authority found most people actually can’t make a decision and procrastinate.

“We want to provide mass-market post-retirement product design but that’s really difficult because everyone is so different from each other [in terms of income and life expectancy],” she explains.

To address these problems, trustees needed to understand behavioural biases so they could nudge members towards improved outcomes.

Schroders has tested three different retirement cohorts in Australia, based on low, medium and high amounts at retirement of $250,000, $800,000 and $1.4 million, respectively. The firm concluded that low-income earners should employ a strong growth strategy with their retirement balances because there was an aged pension safety net. This is counter to expected behaviour for that group of retirees.

“What we concluded is [low-income] people shouldn’t be conservative…but, behaviourally, I suspect they won’t actually do this,’’ she says.

Lesley-Ann Morgan spoke to Investment Magazine ahead of visiting Australia to participate in a panel discussion on the topic ‘Using data to make better retirement decisions’ at the upcoming Australian Institute of Superannuation Trustees’ Conference of Major Superannuation Funds (CMSF) 2018, held in Brisbane on March 14-16.

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